Your property management experience will definitely help you avoid common mistakes.

But that's been common for all areas I have invested in. 

@Ryan Lee, errors like this are fairly common.

This scenario gets to be more of an issue when you have an unethical wholesaler on the other end.In every industry there are bad seeds.

Just frustrated with how difficult it is for people to adopt intelligence and common sense, backed by data and evidence, yet it is effortless for people to religiously embrace absolute NONSENSE.

Attorneys will tell you it's important because they make money on doomsday scenarios.

We don’t ever use the “best case scenario” or quick sale strategies in our projections.

In this scenario, they are investing in the auction and can take a share of the profits rather than operating as a traditional lender.

first thing one should do is figure out if they quality the 2  in  5 tax treatment and if the home has appreciated a ton like 250 to 500k which is very common in coastal markets and Denver for instance.. selling would be far smarter than renting. pocket the tax free and find another rental. turning it into a rental you lose that one time tax treatment which in my mind is the very best for real estate. 

In both your scenarios, the lender should be able to recoup their investment provided there are no other creditors (or at least liabilities that exceed assets).